NORTH CENTRAL AIRLINES 7500 northliner drive. minneapolis. minnesota board or directors Hal N. Carr* Chairman G. F. DeCoursin* Chan Gurney management Samuel H. Maslen* Jay Phillips Morton B. Phillips Hal N. Carr .... . . . ... . ...... . . Chairman of the Board and Chief Executive Officer Bernard Sweet .. . .. . .. . .. . ...... . . . .. . .... . ... President John P. Dow .. . .. .. .. . . . .. . . Vice President and Secretary Robert L. Gren .. .. . . . ... .. . ... Vice President-Maintenance and Engineering Daniel F. May . .. . . . .. . . . ..... . .... Vice President-Finance REGISTRARS AND STOCK TRANSFER AGENTS : First National City Bank, New York, New York Joseph E. Rapkin H.P. Skoglund Bernard Sweet Kenneth B. Willett "Executive Committee David E. Moran .... .. ...... Vice President-Traffic and Sales T. M. Needham ......... . Vice President-Ground Operations Arthur E. Schwandt . .. ... Vice President-Industrial Relations G. F. Wallis ............... Vice President-Flight Operations J. F. Nixon ............ . ....... . .. . .... . . ..... Treasurer Gowan J. Miller ...................... Assistant Secretary Charlotte G. Westberg .......... . ..... Assistant Secretary ANNUAL MEETING: Northwestern National Bank of Minneapolis, Minneapolis, Minnesota First Wednesday in April (April 4, 1973) Wausau, Wisconsin highlights or growth 1972 1971 Gain OPERATING REVENUES .................................. $120,627,000 $100,865,000 19.6% OPERATING PROFIT ..................................... $ 12,355,000 $ 5,815,000 112.5 NET EARNINGS ......................................... $ 7,536,000 $ 1,225,000 515.2 EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 11 445.5 CASH FLOW FROM OPERATIONS .......................... $ 13,933,000 $ 9,204,000 51.4 WORKING CAPITAL ...................................... $ 5,109,000 $ 3,900,000 31.0 STOCKHOLDERS' EQUITY ................................ $ 34,787,000 $ 27,192,000 27.9 PASSENGERS CARRIED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,319,000 3,793,000 13.9 REVENUE PASSENGER MILES ............................ 1,029,193,000 865,736,000 18.9 March 2, 1973 to our stockholders,, employees,, and riends: Earnings of $7,536,000-largest in North Central's 25-year history-highlight the many rec- ords set by the company in 1972. Revenues reached $120,627,000, and over four million passengers were carried. While revenues gained 20 percent, operating expenses rose only 14 percent to $108,272,000. The operating profit of $12,355,000 more than doubled the $5,815,000 of 1971. After interest expense of $3,216,000 and income taxes of $2,903,000, up because of increased earnings, the company had record operating earnings of $6,493,000. Disposition of aircraft added $1,043,000 for total net earnings of $7,536,000. Earnings per share reached $.60 in 1972 compared with $.11 the previous year. Based on the company's impressive performance and strong financial position, a cash dividend of $.05 per share of common stock ($623,000) was declared by the Board of Directors on January 26, 1973. North Central retaif"'led the distinction of having the best financial record in the regional airline industry. The company has operated profitably for 18 of the 19 years under present management. Stockholder equity has reached a record $34,787,000, including $14,262,000 in retained earnings. Traffic records were set in 1972 as North Central carried 4,319,000 passengers and flew one billion revenue passenger miles for the first time in its history. Passenger traffic was 14 per- cent ahead of 1971, while revenue passenger miles gained 19 percent to 1,029,193,000. The 12,181,000 cargo ton miles represented a 29 percent increase. Operations in 1972 were favorably affected by passenger gains on long-haul routes, the improved general economy, and greater public service revenues .for providing transporta- tion to smaller communities. A strike against another airline serving some North Central cities added to revenues, but no significant financial benefit resulted as $1,734,000 was re- turned to the struck carrier under the airlines' mutual aid agreement. Again this year, the airline maintained an excellent operating performance by completing 99 percent of its 27,840,000 scheduled miles. This is one of the best completion records in the entire airline industry. Seeking to further expand operations, North Central applied to the Civil Aeronautics Board for nonstop service between Detroit and Boston. The 632-mile route is the largest passen- ger market in the nation with nonstop flights by only one carrier. The company also refiled its request for an expedited hearing on the 908-mile Milwaukee-Denver nonstop route. On service to Atlanta, the Board reopened proceedings, and North Central proposes flights from Detroit and Cincinnati. Concern for passengers and the environment led to several new programs. Effective-screen- ing procedures tightened security at every station, and special "non-smoking" sections on the aircraft increased passenger comfort. All jet engines are converted to the low-smoke configuration, and noise-abatement flight techniques have been improved. The airline is evaluating and testing methods of further reducing noise levels on the ground. Under its flight equipment program, three new 100-passenger Douglas DC-9 fan jets were ordered for delivery in April, May and October 1973. Two others were acquired this Janu- ary from another airline as replacement aircraft. After October, the company will have a fleet of 19 DC-9s and 33 Convair 580 prop-jets to accommodate continuing growth, improve service and expand charter operations. North Central looks forward to growth and prosperity rivaling that achieved in its first 25 years. With the continuing support of stockholders, passengers and employees, the com- pany is confident the dramatic progress will be maintained. HAL N. CARR Chairman of the Board and Chief Executive Officer Sincerely, BERNARD SWEET President trafic growth and perlormance For the first time in its history, North Central carried over four million passengers and flew one billion revenue passenger miles in a year. The 4,318,643 passengers for 1972 represented an impressive 14 percent increase, 525,310 passengers more than the 3,793,333 served the previous year. The 18,156 passengers boarded on June 30 set a single-day high. A new monthly mark came in August when 473,955 passengers flew on jet-powered Northliners. Traffic in each month exceeded the corres- ponding month of 1971 as steady growth developed on the longer nonstops-particularly Milwaukee- New York, Milwaukee-Detroit- Toronto, and between the Twin Cities and Denver/Chicago/Milwaukee. Revenue passenger miles climbed 19 percent to 1,029,192,937, compared with 865,736,212 in 1971. Available seat miles rose only 4.5 percent to 2,048,133,449. The 50.3 percent passenger load factor for 1972 is the best since 1956 when 26-passenger DC-3 aircraft were flown. The 1972 records resulted from increased long-haul traffic, an upswing in the nation's economy, and the extra service provided during a strike against another carrier which serves some cities on North Central's system. During the past 25 years, the company's annual passenger increase has averaged 25 percent over the previous year. Starting with only 11,398 passengers in 1948, North Central passed a half-million by 1956, and one million in 1960. The two- million passenger mark came just six years later. Aided by the introduction of jet aircraft and long-haul route awards, the airline served three million passengers during 1968 and nearly four-and-a-half million in 1972. Since inaugurating service, North Central has carried 34.2 million passengers and flown 6.5 billion passenger miles. To provide more flights for the traveling public in peak traffic periods, the airline operated 2,385 "extra sections" in 1972 that accommodated 80,054 passengers. A record 510 charters took 63,548 people to points in 39 states, the District of Columbia, Canada, Mexico, the Bahamas and Puerto Rico. In addition, scenic flights over North Central communities introduced 7,125 persons to the company's service. Cargo ton miles jumped 29 percent to an unprecedented 12,180,713 for the year. Air freight alone soared 37 percent. Mail gained 18 percent, and express was up seven percent. The 1,318,051 ton miles flown during September is a cargo milestone. social action programs Corporate concern with air pollution, noise abatement, waste disposal, security, and employment practices generated specific programs to make North Central a more compatible neighbor and business partner in the communities it serves. The airline completed its $300,000 jet-engine retrofit project in 1972, when the last of its JT8D engines was converted to a low-smoke con- figuration. North Central now flies a "smokeless" jet fleet. The industry- wide program will eliminate virtually all of the particle air pollution caused by aircraft. Early in 1972, the airline also modified its JT8D engines to eliminate fuel venting during takeoff. The project was undertaken after tests indicated no adverse effect on safety and final approval was re- ceived from the engine manufacturer. For passenger comfort, no smoking sections are designated on all aircraft. To minimize pollution from internal combustion engines, electric-powered tractors were introduced on a test basis at several airports. The company is continuing to purchase bio- degradable products for cleaning and the most disposable fluids for de-icing. Solid wastes are removed in accordance with the federal and state standards, and the use of recycled paper has been increased. North Central successfully improved its noise-abatement flight techniques. Takeoff and landing procedures, designed to "keep them high" over populated areas throughout the system, have reduced noise levels on the ground as much as 50 percent. Use of assigned preferential runways, now standard procedure, restricts traffic over residential districts. Again this year, required engine run-ups have been voluntarily curtailed by North Central between 11 p.m. and 6 a.m. While investment in noise abatement is difficult to estimate, a considerable portion of the increase in flight operating costs can be attributed to implementing environment-oriented procedures. 25 YEARS North Central's operating perform- ance, consistently one of the highest in the entire airline industry, again reached 99 percent, as the company completed 27,523,043 of its 27,840,184 scheduled miles. This excellence was attained although North Central has the shortest average stage length of any carrier, operates in severe winter weather for many months over most of its system, and in 1972 handled the greatest passenger and cargo traffic in its history. Strict adherence to the company's exacting maintenance program continues to be a significant factor in achieving the high level of per- formance. Of the 220,000 departures scheduled in 1972, only one-tenth of one percent were cancelled for maintenance reasons, and less than one and a half percent were delayed by mechanicals. North Central's steady growth and enviable operating record pay tribute to the company's 3,200 employees and their dedication to the task of providing dependable scheduled airline service. A system-wide airport security program has been enacted in accordance with Federal Government directives. Experienced security agents now screen each passenger electronically and search all carry-on luggage prior to boarding. Early in 1973, airport operators are to add armed guards to further improve overall security. During 1972, North Central expanded its "equal opportunity" employment program, with emphasis on jobs for disadvantaged minority group members and Vietnam veterans. Employee participation in the National Guard and Reserve is fully supported by the company. The company retained active membership in JOBS, the manpower training plan sponsored jointly by the U.S. Department of Labor and the National Alliance of Businessmen. North Central is proud of its present social action and environmental efforts, and will pursue future programs which are beneficial to the community. 5 route development program North Central expanded its route development program in 1972 by applying to the Civil Aeronautics Board (CAB) for the first competitive nonstop service between Detroit and Boston. Th is passenger market is the largest in the nation with only one carrier providing nonstop flights. The company proposes eight flights daily, using 100-passenger DC-9 fan jets, over the 632-mile route. Forecasts show a first-year potential of 162,000 passengers and a $1. 7 million operating profit. Single-plane service would be available for the first time between Boston and Kalamazoo/Battle Creek, Grand Rapids, Saginaw/Bay City/ Midland and Flint, Michigan; and South Bend, Indiana. More than a dozen other Michigan, Minnesota and Wisconsin cities would benefit from single-carrier connections which are not available now. The Detroit-Boston potential may be even greater than projected since traffic has exceeded estimates on similar long-haul routes (Twin Cities- Denver and Milwaukee-New York) awarded in 1969 and 1970. The company refiled its 1970 request for an expedited hearing on the Milwaukee-Denver nonstop appi ica- tion. The 908-mile segment would be the longest route on the airline's system. CAB action will probably be taken within a year. North Central strengthened its position in 1972 as the dominant carrier serving Milwaukee. The company carried 388,000 passengers, accounting for 41 percent of all boardings and 155,000 more passengers than the next highest of the four other airlines serving that the ruture Entering its second 25 years of service, North Central is confident that steady growth will continue. An almost unlimited passenger and cargo market exists. Although 55 percent of American adults have flown on scheduled airlines at some time, up from 33 percent ten years ago, only 23 percent fly in a year. The potential for cargo growth is even greater. With a fleet of 19 DC-9s and 33 Convair 580s for most of 1973, jet flights will be added to many communities, and charter activity can be increased. Should new routes be city. An even greater share of the Milwaukee market is anticipated in 1973. To meet increased passenger demand on the Milwaukee-New York route, a fifth daily round trip is being added this spring. The CAB has reopened the record in the Detroit, Cleveland, Cincinnati- Atlanta Investigation. North Central is proposing nonstop service to Atlanta from Detroit and Cincinnati. Hearings began in February 1973, and a decision by the Board is anticipated in 1974. North Central started operations in 1948 with a 1,028-mi:e system connecting 19 cities. It had 2,400 route miles when present manage- ment joined the company in 1954. An aggressive route development program was instituted, and the system tripled by 1961. Today the company serves 90 cities in 13 states and Canada, spanning a 9,900-mile route system. Current filings with the CAB involve 5,431 new route miles, including service to Atlanta, Boston, Philadelphia, Winnipeg and Montreal. Activity on route applications is expected to increase in 1973, since the virtual moratorium in 1970 when the airline industry was encountering adverse economic conditions. The following is a summary of North Central's principal applications awaiting initial hearings or action by the CAB : DETROIT-BOSTON NONSTOP North Central would provide the first competitive nonstop service between Detroit and Boston and also offer the only single- plane service between Boston and seven cities in Michigan plus South Bend, Indiana- via Detroit. (632 miles) awarded, aircraft are available to start immediate service. Astute scheduling, dependable service and aggressive marketing have a;ready stimulated travel, particularly on the Milwaukee-New York, Milwaukee-Detroit, Twin Cities- Denver, and Twin Cities-Milwaukee nonstops. Should the airline receive the proposed Detroit-Boston, Detroit-New York or Milwaukee- Denver routes, similar programs will be developed. The company expects continued success on its profitable, long-haul routes. Investment in more efficient aircraft and ground support equipment, 25 YEARS MILWAUKEE-DENVER NONSTOP A request has been refiled for an expedited hearing on the company's application for nonstop service between Milwaukee and Denver. (908 miles) DETROIT, CLEVELAND, CINCINNATI-ATLANTA The CAB reopened the record in this proceeding. The company has filed additional exhibits to serve Atlanta from Detroit and Cinc innati . Hearings began in February 1973. (968 miles) MICHIGAN POINTS-DETROIT-NEW YORK This proposed authority would enable North Central to provide new, single-plane service through Detroit to New York City from ten Michigan cities . (501 miles) COLUMBUS, DAYTON, CINCINNATI- PHILADELPHIA NONSTOP The company's request to serve Philadelphia from Columbus, Dayton, and Cincinnati has been consolidated into the CAB 's Ohio/ Indiana Points Nonstop Service Investigation . (1 ,389 miles) TWIN CITIES-KANSAS CITY NONSTOP This application would permit North Central to operate nonstop flights in addition to the present two-stop service. (404 miles) DETROIT-MONTREAL, VIA TORONTO Authority to serve Montreal from Detroit, via Toronto, was requested under a proposed amendment to the 1966 Bilateral Air Transport Agreement between the United States and Canada. With this route , North Central could also offer convenient single-plane service from Minneapolis/ St. Paul and Milwaukee to Montreal. Action on this application is awaiting further discussions between officials of the United States and Canada. (315 miles) DULUTH/SUPERIOR-WINNIPEG NONSTOP This route would allow nonstop service from Duluth/Superior to Winnipeg , and also make available single-carrier service between a number of Wisconsin communities and Winnipeg . The application is bei ng considered by United States and Canadian officials under the Bil ateral Air Transport Agreement. (314 miles) as well as electronic computers, has enabled the airline to boost productivity, although the number of employees has remained virtually constant during the last three years. With a continuing gain in productivity, the overall effect will be a greater increase in revenues than in operating costs. North Central's financial strength, from profitable operations in 18 of the last 19 years, provides a firm foundation for the airline to turn opportunity into reality. With continued improvement in the nation's general economy and effective restraints on costs, the company expects 1973 to be another record-breaking year. 7 RAPID CITY -- -- -- -- -- -- -- 25 YEARS Starting as a small subsidiary of a Wisconsin truck manufacturer, North Central has become one of the nation's leading regional airlines, serving 90 cities in 13 states and Canada over a 9,900-mile route system. The company was incorporated as Wisconsin Central Airlines in 1944 by FWD Corporation of Clintonville (formerly The Four Wheel Drive Auto Company) to carry its officials -- -- -- WINNIPEG' ', ',,, INTERN ~ NAL FAL ', ', ' ~~o D MOORHEAD $ BEIJ)I I ---- -- -- -- -- -- ----r I I I I I I I I I I I ,. BOSTON ------------- ______ ... ---------------- NEW YORK ------------- NEWARK ------ PHILADELPHIA PRESENT ROUTES PROPOSED ROUTES - PROGRESS and area businessmen between Clintonville and Chicago. After complying with a Federal order to sever ties with FWD, the airline received its operating certificate in 1947. Scheduled flights were inaugurated on February 24, 1948, with three nine-passenger Lockheed lOA Electras operating over a 1,028-mile route system which connected Chicago with 18 Wisconsin and Minnesota communities. Sixteen ot these "pioneer" cities are still served by the airline. Corporate offices moved to Madison before operations began. The company's name was changed to North Central Airlines in 1952 when headquarters were established at the Minneapolis-St. Paul International Airport. As traffic steadily increased, the airline upgraded its fleet to meet passenger demands. Five types of aircraft have been flown by the company in its first 25 years: the Douglas DC-9 fan jet and Convair 580 prop-jet since 1967; the Convair 440, introduced in 1959; the Douglas D - C -3 which debuted in 1951, and the original Lockheed l0A. Highlighting its first quarter-century by carrying over four million passengers and achieving record earnings, North Central embarks on a new era of progress. 10 NORTH balance sheet ASSETS CURRENT ASSETS Cash including certificates of deposit of $5,050,327 in 1972 and $1,410,845 in 1971 ................................ . Investment in commercial paper (note D) ..................... .. . Accounts receivable (note A) ................................. . Flight equipment parts and operating supplies - less reserves of $443,447 in 1972 and $345,848 in 1971 (notes A and B) ........ . Prepaid expenses and sundry deposits (note A) ................. . Total current assets ................................... . PROPERTY AND EQUIPMENT - at cost Flight equipment (note B) ............. . ..... .. : .............. . Ground property and equipment .............................. . Improvements to leased property .............................. . Less accumulated depreciation (note A) ...................... . Advance payments on flight equipment (note D) ... ..... : ....... . . . DEFERRED CHARGES AND OTHER ASSETS Unamortized development and preoperating costs (note A) ........ . Unamortized discount and expense on debt (note A) . ......... ... . . Insurance receivable (note D) ................................. . Rentals and other ........................................... . LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt (note B) ......... ........... . Accounts payable (note A) .................................... . Tickets outstanding (note A) .............. : ...... ............. . Accrued compensation, taxes and other expenses (note A) ........ . Income taxes (notes A and I) .................................. . Total current liabilities ............. ............. ....... . LONG-TERM OBLIGATIONS Long-term debt - less current maturities (note B) ................ . Deferred income taxes (notes A and I) . . . .... . .................. . Warrant obligation (note B) . . ............... . ..... ............ . COMMITMENTS (note D) STOCKHOLDERS' EQUITY (notes 8, E and F) Common stock - authorized 16,000,000 shares of $.20 par value ... . Additional paid-in capital .................................... . Retained earnings .......................................... . The accompanying notes are an integral part of this statement. CENTRAL December 31 1972 1971 $ 8,897,276 $ 4,436,930 6,500,000 2,000,000 11,085,569 10,959,872 2,734,408 2,703,047 4,588,388 5,624,890 33,805,641 25,724,739 71,681,797 74,684,520 6,458,707 6,303,069 3,258,633 3,008,130 81,399,137 83,995,719 25,501,845 21,104,499 55,897,292 62,891,220 3,246,103 59,143,395 62,891,220 2,332,898 3,117,984 234,104 298,984 4,300,000 2,230,945 2,241,049 9,097,947 5,658,017 $102,046,983 $94,273,976 $ 7,075,237 $ 7,088,609 10,344,324 8,596,991 810,338 543,715 7,856,898 5,595,541 2,610,000 28,696,797 21 ,824,856 . ) 36,327,040 43,407,267 1,990,762 1,621,000 ~ 245,100 229,200 38,562,902 45,257,467 2,492,550 2,489,170 18,032,384 17,976,011 14,262,350 6,726,472 34,787,284 27,191,653 $102,046,983 $94,273,976 AIRLINES, INC. 25 YEARS statement or earnings Years ended December 31 OPERATING REVENUES 1972 1971 Passenger (note A) ......................................... . $ 99,259,565 $ 83,820,866 Freight and express ............ . ............................ . 6,331,095 5,113,178 Public service revenues (note G) .............................. . 9,089,650 6,884,964 Mail ...................................................... . 1,308,575 1,214,895 Non-scheduled service and other ... . .......................... . 4,638,557 3,831,441 Total operating revenues ............................... . 120,627,442 100,865,344 OPERATING EXPENSES Flying operations ........................................... . 28,51 2,471 27,380,498 Maintenance ............. ....... ............................ 18,219,258 15,979,974 Aircraft and traffic servicing .................................. . 26,690,000 23,580,1 40 Passenger service ........................... ............... . 7,579,386 6,269,080 Promotion and sales ......................................... . 10,646,128 8,366,053 General and administrative .......... ....... ..... ........ ..... . 7,839,584 6,163,999 Depreciation and amortization (note A) ........... .... .. ........ . 6,990,351 7,240,431 Mutual Aid payments (note H) ................................ . 1,794,947 69,763 Total operating expenses .............................. . 108,272,125 95,049,938 Operating profit .................................. . 12,355,317 5,815,406 OTHER (INCOME) EXPENSES Interest expense (note A) . . ................................... . 3,215,696 4,228,541 Other - net ............. . .................................. . (256,124) (181,843) Total other expenses ...................... ...... ...... . 2,959,572 4,046,698 Earnings before income taxes and extraordinary item ... . 9,395,745 1,768,708 INCOME TAXES (notes A and I) Currently payable - less investment tax credits of $2,019,000 in 1972 ......................................... 2,610,000 Deferred - less investment tax credits, $231,000 in 1972 and $470,000 in 1971 ............... ..... .... . 293,049 544,000 Total income taxes ..................................... 2,903,049 544,000 Earnings before extraordinary item ................ ... 6,492,696 1,224,708 EXTRAORDINARY ITEM Gain on disposition of flight equipment - less related deferred income taxes of $452,000 (note A) ........... 1,043,182 NET EARNINGS .................................. $ 7,535,878 $ 1,224,708 EARNINGS PER SHARE (note J) Earnings before extraordinary item ............................. $ .52 $ .11 Extraordinary item ........................................... .08 - - NET EARNINGS PER SHARE ..................... ... $ .60 $ .11 - - -- The accompanying notes are an integral part o_t this statement. 11 12 statement of' changes in f'inancial position SOURCES OF WORKING CAPITAL From operations Net earnings before extraordinary item ....................... . Charges to earnings not using working capital Depreciation of property and equipment (note A) .......... . Amortization of deferred charges (note A) ................ . Deferred income taxes (note I) .......................... . Loss on disposition of property and equipment ............ . Working capital provided from operations exclusive of extraordinary item ................... . Extraordinary item providing working capital - gain on disposition of flight equipment (note A) ..................... . Proceeds in excess of the gain from disposition of property and equipment ................................... . Proceeds from sale of common stock ........................... . Increase in long-term debt ................................... . Other ..................................................... . APPLICATIONS OF WORKING CAPITAL Additions to property and equipment ........................... . Additions to deferred charges ................................. . Reduction of long-term debt ........................... . ...... . Increase in insurance receivable .................. ........ ... . . INCREASE IN WORKING CAPITAL (note K) ................. . Working capital at beginning of year ........................... . Working capital at end of year ................................ . The accompanying notes are an integral part of this statement. Years ended December 31 1972 1971 $ 6,492,696 6,178,603 1,001,500 239,762 20,397 13,932,958 1,043,182 3,279,735 59,753 18,315,628 5,278,910 447,530 7,080,227 4,300,000 17,106,667 1,208,961 3,899,883 $ 5,108,844 $ 1,224,708 6,438,279 986,182 544,000 10,979 9,204,148 6,024,583 8,102,730 2,995,024 134,400 26,460,885 2,353,857 872,184 10,966,706 14,192,747 12,268,138 (8,368,255) $ 3,899,883 statement of' changes in stockholders equity Years ended December 31, 1972 and 1971 Balance at January 1, 1971 ............. .. . Proceeds of public stock offering - less expenses ....... ... ........ . .. . . Conversion of 5 % subordinated convertible debentures into common stock (note B) ............... . Excess value of warrants issued in warrant exchange ................. . Net earnings for the year ... ............ . Balance at December 31, 1971 ............ . Exercise of stock options (note F) ........ . Exercise of stock warrants (note F) ....... . Net earnings for the year ............... . Balance at December 31, 1972 ............ . Common Stock Shares Outstanding 10,463,087 1,980,000 2,765 12,445,852 16,450 450 12,462,752 Amount $2,092,617 396,000 553 2,489,170 3,290 90 $2,492,550 The accompanying notes are an integral part of this statement. Additional Paid-in Capital $10,228,834 7,706,730 20,447 20,000 17,976,011 53,988 2,385 $18,032,384 $ Retained Earnings (note B) 5,501,764 1,224,708 6,726,472 7,535,878 $14,262,350 25 YEARS ten-year earnings summary OPERATING REVENUES 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 Passenger .... . ........................ $99,259.565 $83,820,866 $76,954,521 $57,073,369 $44,628,769 $33,482,371 $30,261,479 $23,720,203 $20,002,281 $18,064,524 Public service revenues .................. 9,Cf89,650 6,884,964 5. 131,306 4,016,386 4,667,639 5,249,563 5.767,888 7,199,41 8 7,274,370 7,644,080 Other . ............... . .............. . . 12.278,227 10,159,514 9,866,126 7,338,168 5,929,518 4,118,543 3,583,304 2,971.41 0 2,438,126 2,168,100 120,627.442 100,865,344 91 ,951,953 68,427,923 55,225,926 42,850,477 39,612,671 33,891,031 29.714,777 27,876,704 OPERATING EXPENSES Direct expenses ......................... 46.731 ,729 43,360,472 39,207,293 31 ,647,246 25,525,000 19,811 ,886 17,980,535 15,356,876 13,666,142 13,076,180 Indirect expenses ....................... 54.550,045 44,449,035 37,879.733 30,782,288 24,318,200 19,523,811 17,062,543 13,970,237 12,303,601 11,812.690 Depreciation and amortization .... . .. . ..... 6,990.351 7,240,431 6,700.175 5,605,500 4,356,893 2,626,251 2,253,361 1,997,488 1,712,800 1,541,857 - - - 108,272.125 95,049,938 83.787.201 68,035,034 54,200,093 41 ,961.948 37,296,439 31 ,324,601 27,682,543 26,430,727 OPERATING PROFIT ..................... 12,355,317 5,815,406 8,164.752 392,889 1,025,833 888,529 2,316,232 2,566,430 2,032,234 1,445,977 Non-operating income and (expenses), net .. (2,939.175) (4,035.719) (4,875.788) (4,677,092) (3,008,205) (628,731) (464,974) (442,894) (348,305) (428,423) EARNINGS (Loss) before taxes .. .. . . . ..... 9,416,142 1,779,687 3,288,964 (4,284,203) (1,982,372) 259,798 1.851,258 2,123,536 1.683,929 1,017,554 Income taxes ........ . .... .. .. . .. .. . . ... 2,903,049 544,000 451,000 (1,934.888) (869,000) (336,010) 720,647 1,006,520 873,304 514,497 EARNINGS (Loss) before gain (loss) on disposition of equipment ............ 6,513,093 1,235,687 2,837,964 (2,349,315) (1,113,372) 595,808 1,130,611 1,117.016 810,625 503,057 Gain (Loss) on disposition of equipment, less income taxes ... .. ............... . 1,022,785 (10,979) (43,349) (29,080) 1,183,588 924,316 24,000 21 ,736 33,939 18,656 Prior years' adjustment due to change in accounting .. . ......... .. . .. . (617,000) NET EARNINGS (LOSS) ...... . .. .. .... .. . $ 7.535.878 $ 1.224, 708 $ 2,177,615 $ (2,378,395) $ 70.216 $1 ,520,124 $ 1,154,611 $ 1,138,752 $ 844,564 $ 521.713 THIS SUMMARY DOES NOT INCLUDE ALL DETAILED INFORMATION CONTAI NED IN THE ANNUAL REPORTS FOR RELATED YEARS. AND IS NOT COVERED BY THE AUDITORS' REPORT HEREIN. notes to financial statements December 31, 1972 and 1971 Note A - Summary of Significant Accounting Policies - The com- pany, regulated by the Civil Aeronautics Board (CAB), uses the Uni- form System of Accounts and Reports for Certificated Air Carriers as required by the CAB, which are consistent with generally ac- cepted accounting principles. The principal policies followed by the company are: Accounts receivable: The company provides an allowance for cer- tain uncollectable accounts receivable. Flight equipment parts and operating supplies: These are priced at average cost. Reserves are provided by allocating costs of repair- able items over the life of related flight equipment. Prepaid expenses - engine overhaul: The company includes in pre- paid expense that portion of engine overhaul costs which will expire during the next operating cycle ($2,338,000 in 1972 and $2,944,000 in 1971). Engine overhaul costs are charged to expense as incurred. Capitalized interest: Interest is capitalized on funds associated with major project expenditures such as acquisition of flight equip- ment, construction of ground facilities and expenditures for route development and preoperating costs. Capitalization of interest ceases when projects become operational. The capitalized interest is then amortized over the useful lives of the related assets for financial reporting purposes but charged to current period expense for income tax reporting purposes. Depreciation: Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their esti- mated service lives on a straight line basis for financial and tax reporting purposes. Prior to 1968, accelerated depreciation methods were used for tax purposes. Flight equipment is being depreciated to residual values (15% of cost): Convair 580 based on a common retirement date of June 1979 and DC-9-30 based on 15 year lives. Deferred charges: Expenditures for route development are deferred and amortized over the life of temporary certificates, or five years for permanent certificates. Aircraft preoperating costs are amor- tized over approximately eight years. Certain expenditures are expensed when incurred for tax reporting purposes. Unamortized discount and expense on debt are amortized using the "interest method" over the term of the loan. Pension costs: The company has pension plans for substantially all of its employees, and funds current pension costs accrued and interest on unfunded prior service cost. Revenues: Revenues are recognized when the related services are rendered. Tickets outstanding at December 31st represent tickets sold for the company's flights but unused by passengers at that date. Tickets sold for flights on other airlines, for which reimburse- ment has not been made, are included in accounts payable. Tickets sold by others and lifted at time of flight by the company are in- cluded in accounts receivable until payment is received. Disposition of property and equipment: To the extent allowable, the company defers gains on disposition of property and equipment for tax reporting purposes while recognizing them currently for finan- cial reporting purposes. Income taxes: The company uses the flow-through method of ac- counting for investment tax credit which reduces income tax ex- pense when the related liability is reduced. The company recognizes deferred income taxes resulting from differences in financial and income tax reporting of capitalized interest, depreciation, deferred charges, December 31, 1971 vaca- tion pay accrual and gains on disposition of property and equipment. Note B - Long-Term Debt - Long-term debt at December 31 con- sists of: 1972 1971 Quarterly installment notes (a) . . . . . . . . . . . . . $ 2,937,783 $ 8,813,348 Semi-annual installment notes (b) . . . . . . . . . . 2,350,226 2,937,783 7% notes, due in quarterly installments of $1,468,891 and $1,958,522 from July, 1973 through October, 1978 . ....... .. ....... . Total due banks and insurance companies (c) .. 7% subordinated notes (d) ............... . 5 % subordinated convertible debentures (e) . Sundry . ..... . .. .. ............... . ..... . Total long-term debt ..................... . Less current maturities ................ . 35,253,393 40,541,402 2,100,000 721,500 39,375 43,402,277 7,075,237 $36,327,040 35,253,393 47,004,524 2,700,000 721,500 69,852 50,495,876 7,088,609 $43,407,267 (a) Due in quarterly installments of $979,261 and $1,958,522 through April, 1973; interest at% above bank's prime rate (effec- tive rate was e% at December 31, 1972). (b) Payable in semi-annual installments of $293,778 due from April 1972 through October 1976; interest at 1 % above bank's prime rate (effective rate was 7% at December 31, 1972). (c) Total loans are collateralized by substantially all flight equip- ment and spare aircraft parts owned by the company. Two equip- 13 14 notes to f'inancial statements ( continued) ment manufacturers partially guarantee these loans. Included in the loan agreement provisions are restrictions on dividend pay- ments, capital expenditures, additional borrowings and require- ments related to minimum working capital and net worth. The company has a commitment to retire 259,511 warrants, issued to loan holders in consideration of deferring certain debt repay- ments, at $1.50 per warrant that has not been exercised by Novem- ber 30, 1979 (note F). The obligation is being accrued as additional interest expense over the remaining term of the loan. (d) Due in semi-annual installments of $300,000 from September 1971 through March 1976. Stock purchase warrants issued in con- nection with this debt enable the holders to purchase a total of 200,000 common shares (note F). (e) Due on June 1, 1978 and convertible into common shares at $8.55 a share to maturity. Note C - Pension Costs - Total pension expense was $2,553,000 for 1972 and $1,949,000 for 1971. At the 1972 actuarial valuation date, the company had funded in excess of vested benefits for all plans by approximately $950,000. Note D - Commitments - Approximate minimum annual lease com- mitments for five DC-9-30 and nine Convair 580 aircraft total $3,876,000 at December 31, 1972 and $4,030,000 at December 31, 1971 expiring at various dates from 1978 through 1981. The amount above includes the commitment resulting from the sale (upon which no gain was recognized) and leaseback of one Convair 580 aircraft finalized during January 1973. The company also leases office and operational facilities, terminal facilities, computer and other equip- ment under long-term agreements expiring on various dates through 1996 for which minimum annual rentals are approximately $7,077,- 000 and $6,460,000 at December 31, 1972 and 1971, respectively. At December 31, 1972, the company had purchase commitments on three new DC-9-30 aircraft for which they have advanced $3,246,000. An additional $11,340,000 will be expended by the company in ful- filling these commitments. On January 5, 1973, the company final- ized an agreement to purchase two used DC-9-30 aircraft for $7,100,000. A portion of the insurance receivable included in other assets is to be used toward payment on one of these aircraft. Note E - Shareholder Disclosure of Ownership - The CAB requires that any person who owns, as of December 31 of any year, or who acquires ownership, as of ten days after acquisition, of more than 5% in the aggregate of the company's common stock, either bene- ficially or as trustee, must file a report with the Board containing information required by 245.13 of The Federal Aviation Act unless the person has previously filed such a report. Any shareholder who believes that he may be required to file may obtain further informa- tion by writing to the Director, Bureau of Operating Rights, CAB, Washington, D. C . 20428. Note F - Common Stock - Under a qualified plan, 350,000 shares of unissued common stock were reserved for officers and key e mployees. Options expire five years after date of grant. Options granted in 1967 for 5,000 shares expired in 1972. Those outstand- ing and exercisable and dates granted, at December 31, 1972 are: auditors' report Stockholders and Board of Directors North Central Airlines, Inc. We have examined the balance sheet of North Central Airlines, Inc., (a Wisconsin corporation) as of December 31, 1972, and the related statements of earnirgs, changes in stockholders' equity and changes in financial position for the year then ended. Our examina- tion was made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we considered neces- sary in the circumstances. We have previously examined and reported on the financial statements for the preceding year. 1968 - 5,000 shares at $5.61; 1969 - 18,000 shares at $4.125; 1970 - 47,500 shares at $4.125 and 105,000 shares at $3.25; 1971 - 38,050 shares at $3.19; 1972 - 2,500 shares at $6.375. Options for 16,450 shares were exercised in 1972 and for 115,000 shares in. previous years. Options for 2,500 shares are available for granting. At December 31, 1972 and 1971 there were outstanding warrants to purchase 2,649,061 and 2,649,511 shares, respectively, of com- mon stock. These warrants resulted from public offerings prior to 1972 and from financing transactions as discussed in note B (c) and (d). All warrants enable the holder to purchase common stock at $5.50 per share and expire October 31, 1979. Du-ring January 1973, the Board of Directors declared a $.05 per share dividend payable March 1, 1973 for stockholders of record on February 9, 1973. Note G - Public Service Revenues - The CAB adopted Class Rate VI on June 16, 1972 for the period beginning July 1, 1971 through June 30, 1972. The company received in June 1972 $765,000 per- taining to the period July 1, 1971 through December 31, 1971 in excess of the estimate previously recorded. Note H - Mutual Aid Payments - Under provisions of the Mutual Aid Agreement effective January 1, 1971, the company pays struck carriers who are a party to this agreement. The company would re- ceive such payments in the event of a strike by its employees. Note I - Income Taxes - Unused investment tax credit totals $3,490,000, of which $1,688,000 has been recognized as a reduc- tion of reported deferred provision for income tax expense. The amount available to reduce income taxes payable expires: $1,958,000 in 1975; $791,000 in 1976; $571,000 in 1977; $93,000 in 1978; $77,000 in 1979. Note J - Earnings Per Share - Earnings per share is based on the weighted average number of shares outstanding for the year (12,455,348 in 1972 and 11,455,051 in 1971). Conversion of deben- tures into common stock, exercise of stock options and warrants to purchase stock would not result in material dilution of earnings per share for the years ended December 31, 1972 and 1971. Note K - Net Change in Working Capital Elements - Changes in working capital elements consisted of: Years ended December 31 Increase (decrease) in current assets Cash & certificates of deposit .. . .. . .. . Investment in commercial paper .... . . . Accounts receivable .. .... .. . ... . . . . . Flight equipment parts & supplies ... . . . Prepaid expense & sundry deposits ... . Increase (decrease) in current liabilities Short-term borrowings .. ...... . . .... . Current maturities of long-term debt . . . . Accounts payable & tickets outstanding . . Accrued I iabil ities ........ . .. . .. . .. . . Income taxes .... ... . . ........ ... . . . Increase in working capital ... .. .. . . 1972 1971 $4,460,346 4,500,000 125,697 31,361 (1,036,502) 8,080,902 (13,372) 2,013,956 2,261,357 2,610,000 6,871,941 $1,208,961 $ 2,176,832 2,000,000 (1,654,195) (237,487) (1,166,140) 1,119,010 (3,284,312) (4,878,117) (3,446,552) 459,853 (11,149,128) $12,268,138 In our opinion, the financial statements referred to above pre- sent fairly the financial position of North Central Airlines, Inc., at December 31, 1972, and the results of its operations and changes in financial position for the year then ended, in conformity with gen- erally accepted accounting principles appli_ ed on a basis consistent with that of the preceding year. Minneapolis, Minnesota -4-I.. .n, ~ -'. ~./- /' _._,,m,,.,1H/ February 16, 1973 ~'U/lo .. V VV"?'-7 25 years or growth 25 YEARS PASSENGERS PASSENGER MILES 4.5 (MILLIONS) 1100 / I (MILLIONS) 1J 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 I ; J I , I I ,.,,,-- / V / ___,,,.- / 1000 900 800 700 600 500 400 300 200 100 I / I I I I I / vl ----- ~ 1948 '52 '57 '62 '67 '72 1948 '52 '57 '62 '67 '72 SEAT MILES TON MILES 2200 110 (MILLIONS) (MI LLIONS) 2000 1800 1600 1400 1200 1000 I I I ( I , 100 90 80 70 60 50 I I I I I I 800 600 400 200 J I /"""' ,/ ~/ ~ ~ 40 30 20 10 J I __ _/ / --~ 1948 '52 '57 '62 '67 '72 1948 '52 '57 '62 '67 '72 16 communications program Important extras that entice passengers to choose North Central head I ined the 1972 advertising program. Denver-bound skiers are attracted by ads announcing complimentary "Frostbite" kits. A steak and eggs breakfast is now served on the Twin Cities-Omaha nonstop and other major routes. Innovative "Magellan Service" on luncheon flights features Portuguese wine and a delicatessen sandwich that satisfies even dis- criminating gourmets. Cold Duck and domestic wines are poured to enhance steak dinners for Milwaukee- New York and Twin Cities-Denver passengers. Attention was drawn in advertising to extra conveniences, such as a reserved section on the aircraft for non-smokers and the free "Personal Pak" container which allows carry- on items to be checked as baggage. Ads ran in 70 newspapers and magazines with a combined circulation of 6.5 million readers. Television and radio spots on 72 stations reached an estimated 19.5 million viewers and listeners. Reinforcing the advertising program, North Central's field sales force made over 23,250 personal calls on travel agents, commercial accounts and interline representatives. Sales blitzes promoted new services. northliner museum Mementos dating back to the company's pre-operational days are among the hundreds of items displayed in the Northliner Museum, located at North Central's headquar- ters. Most of these have been contributed by employees and friends. Significant events of the first 25 years of service are depicted by the hundreds of photographs. Comparative route maps and schedules graphically illustrate the airline's growth. Extensive participation in sports travel shows, 350 civic group appearances, and 200 speeches provided additional exposure for the company. The ski season was ushered in with seminars for travel agents and equipment retailers, acquainting them with schedules, in-flight extras and the availability of snow condition reports from ski areas on North Central's system. Near the company's headquarters at the Minneapolis-St. Paul Inter- national Airport, an impressive electronic sign is beaming messages about North Central-cities served, flight frequencies, reservations information, and civic events. The sign, visible to motorists driving both ways on Minnesota's most heavily-used highway, has received very favorable comments. A guided tour program, conducted at the general office and main operations base, was initiated in July. Some 2,000 members of 75 groups have already seized the opportunity for a "behind the scenes" look at the airline. Over 100 tours were given at other company locations. Quarterly financial reports informed stockholders and the investment community of the company's progress. Monthly traffic data and noteworthy events were announced by 32 releases to news media and 25 radio/TV appearances. Some 27 scrap books contain news clippings telling of events as they happened over the years. One volume documents the world-wide acclaim given "728", North Central's corporate DC-3, cited for having flown more hours than any other aircraft in the history of aviation. Other books include old issues of the company newspaper, The Northliner. Stewardess uniforms, back to 1954, highlight the changes in fashion. Citations and award plaques adorn the wall. Display cases hold adver- Special articles ran in newspapers and magazines. Northliner Magazine, the airline's quarterly inflight publication, enjoyed a passenger audience exceeding one million persons each issue. The 32-page magazine contains entertaining and informative features about communities and activities on North Central's system. Based on the number of requests for more copies, the publication is well-received. To increase rapport with the cities it serves, North Central continued its program of appointing business and civic leaders "Presidential Advisors" to the airline. Selected in recognition of their support of the company and contribution to the development of scheduled airline service, Presidential Advisors serve as a communications link between North Central and its communities. The program was instituted in 1954, and the group is limited to 100 individuals. Employees keep abreast of company developments through The North- liner newspaper. Additionally, regular visits are made to each station by corporate officers and managers, who hold informal discussions with personnel. North Central also benefited from publicity initiated by countless friends and supporters. Their efforts on the company's behalf are genuinely appreciated. tisements introducing new service and aircraft-even an early announce- ment of the first Lockheed flight to Janesville. Flight operation records, initial station plans, uniform insignia, promotional items and stationery from Wisconsin Central days are also shown. Pride in the company's first 25 years of progress and a desire to preserve its hi~tory have made the North liner Museum a reality. commemorating 25 years or service An Anniversary Seal, featuring the corporate insignia, is the focal point of the program commemorating North Central's 25 years of scheduled service. The distinctive mallard duck, dubbed " Herman" by employees, is silhouetted against the moon by night and the sun by day-just as it was when the company started operations as Wisconsin Central Airlines on February 24, 1948. The mallard, prized for its speed in flight, is native to the region. The special seal, printed in company colors on " anniversary" silver, is being carried on correspondence. Larger versions are displayed at North Central passenger service counters and gate areas, inside all aircraft, and on ground equipment. An historical montage including the seal appears on ticket envelopes. North Central's first scheduled flights were reenacted over the original 1,028-mile route connecting 18 Wisconsin and Minnesota cities with Chicago. Replacing the nine-passenger Lockheed 10A Electras, was the airline's corporate DC-3, "728", which has flown more hours than any other aircraft in aviation history. The captains at the controls, members of the first pilot group, presently fly the DC-9 fan jets. Commemorative plaques bearing the anniversary seal were presented to officials at each of the "pioneer" cities still served by the airline. Company personnel are participating in the anniversary promotion by using automobile decals noting the 25-year milestone. Personal checks, with a color picture of North Central's DC-9, are being purchased by employees. Photos and news releases reviewing the history of the airline were distributed to newspapers, magazines and radio/television stations in the 90 cities on its 13-state system. The Winter 1973 issue of the passenger-oriented Northliner Magazine carries an article entitled, "25 and Still Growing", which traces company progress. The Anniversary Seal symbolizes North Central's 25 years of service to the traveling public. The corporate insignia, a familiar sight to the first 11,000 passengers in 1948, still identifies the airline to the more than four million people who flew the Route of the Northliners in 1972.